In SaaS M&A, due diligence is the stage where buyers test the accuracy, sustainability, and risks of the business they intend to acquire. For founders, it is also the phase where preparation and precision can materially influence deal value, buyer confidence, and close probability.
This guide breaks down the SaaS due diligence checklist into actionable categories like financial, legal, technology, customer, and team-related, highlighting where issues often arise and how founders can avoid them.
By entering diligence with clarity and control, founders turn the process from a bottleneck into a trust-building opportunity.
Where due diligence fits in the M&A process
Official due diligence typically begins after the Letter of Intent (LOI) is signed and before final closing, most often spanning 4 to 6 weeks. At this stage, buyers examine the business in more depth and proof: validating financial, legal, technical, and commercial representations.
However, skilled advisors begin preparing for diligence much earlier, as soon as a sell-side mandate is signed and well before going to market. The goal is to surface potential issues early, ensure data consistency, and position the business to meet buyer expectations without surprises or renegotiations.
In practice, many core metrics like Annual Recurring Revenue (ARR) and Monthly Recurring Revenue (MRR), retention and margins are scrutinized before the LOI, during initial buyer evaluation. Post-LOI diligence takes this further, requiring documented proof and more granular validation across all facets of the business.
Financial due diligence in SaaS
Financial due diligence is where buyers take a closer look at the real drivers of value in a SaaS business: growth, efficiency, and the durability of recurring revenue.
Most headline metrics will already have been reviewed before the LOI. These numbers help shape the initial valuation and deal terms.
After the LOI is signed, diligence moves from surface-level review to detailed validation. Buyers now want to prove what they’ve seen, ensuring that the company’s financial story holds up under closer inspection. This is where the quality and consistency of your documentation matters.
ARR and MRR trends, cohort-based retention,Customer Acquisition Cost (CAC) payback periods, and gross margin all factor heavily into how buyers view SaaS valuation. Net Revenue Retention (NRR), in particular, signals how well the business grows within its existing customer base, often serving as an indicator of future expansion potential.
Read: AI Valuation Multiples: Most Valuable Industries in 2025
What buyers typically review in the financial due diligence:
- Profit & loss statements (last 24–36 months)
- General ledger and/or trial balance
- Balance sheet and cash flow statements
- Revenue breakdowns: ARR, MRR, churn, deferred revenue
- Customer metrics: CAC, Lifetime Value (LTV), gross margin
- Revenue recognition policies (especially under ASC 606)
- Forecast accuracy and underlying financial model
- Cap table and equity history
- Accounting systems in place
As a founder, watch out for:
- Gaps in documentation for key metrics
- Inconsistencies across different sources or materials
- Ambiguity in revenue recognition or treatment of deferred revenue
How advisors help
An M&A advisor helps founders prepare financial materials that are consistent, well-documented, and aligned with how buyers evaluate SaaS businesses. They can also manage Q&A, maintain clarity across responses, and keep the financial narrative on track, all of which can have a direct impact on valuation and deal momentum.
One early, and simple, piece of advice from our advisory team: make sure you're using an accounting system and proper bookkeeping from the start. Tools like QuickBooks or ProfitWell make it easier to track transactions, stay organized, and ultimately facilitate a smoother due diligence process.
Recommended: Understanding SaaS M&A: What Makes These Deals Different
Legal due diligence in software businesses
Legal due diligence is where buyers assess the company’s structure, ownership rights, compliance posture, and any potential liabilities. The goal is to confirm that the business they are acquiring is legally sound and that there are no hidden risks that could affect valuation or post-close integration.
Key documents and agreements will come under close review. Buyers want to ensure that all intellectual property (IP) is properly owned and assigned, that customer and vendor contracts support a smooth transition of the business, and that the company is in compliance with applicable privacy and data regulations.
What buyers typically review in the legal due diligence:
- Corporate formation documents and historical governance records
- Cap table and financing history
- Customer and vendor contracts, with a focus on change-of-control or assignment clauses
- Intellectual property ownership and assignment (including any contractor-developed IP)
- Privacy and data compliance (GDPR, CCPA, SOC 2, or industry-specific standards)
- Active or potential litigation or regulatory inquiries
- Employee agreements, NDAs, and contractor agreements
As a founder, watch out for:
- Missing or incomplete IP assignments
- Outdated or high-risk customer/vendor contracts
- Unknown legal exposures or pending claims
How advisors help
A skilled advisor helps founders anticipate common diligence questions, organize legal materials clearly, and coordinate with outside counsel where needed. This preparation reduces friction with buyers and helps ensure the company’s legal story is well-positioned to support valuation and close with confidence.
Tip from L40°
Make sure all intellectual property created by employees or contractors has been properly assigned to the company through an IP Assignment Agreement. Many founders assume that if someone is paid to build something, especially a salaried employee, the work automatically belongs to the company. But that’s not always the case. Without a signed agreement explicitly transferring rights, the IP may legally remain with the individual who created it. This can create serious issues during diligence, particularly if that person has since left the company. Getting these documents signed early protects the business, ensures clean ownership of your technology, and avoids unnecessary delays or complications in a deal.
Customer and commercial due diligence
Customer and commercial due diligence focuses on validating the quality and durability of the company’s revenue. Buyers want to understand whether the revenue base is stable, how customer relationships are structured, and whether future growth forecasts are well supported.
Retention, churn, and concentration risk are key areas of focus. Buyers will look closely at how revenue is distributed across the customer base, which customers drive the majority of ARR, and whether there are any upcoming renewals or risks that could materially impact future performance.
They will also assess the company's go-to-market strategy, sales process, and pipeline accuracy, which means evaluating how repeatable and scalable the current
What buyers typically review in the customer and commercial due diligence:
- Retention and churn rates (by customer cohort and by revenue)
- Top customer contracts, including renewal terms and concentration exposure
- Sales pipeline and forecast accuracy
- Sales motion and strategy
- Customer reference plans and willingness of key customers to support the transaction
As a founder, watch out for:
- High churn rates or inconsistent retention metrics
- Heavy revenue concentration in a small number of customers
- Overly optimistic sales forecasts not supported by pipeline data
How advisors help:
An experienced advisor helps founders present customer metrics clearly, frame revenue durability in the right context, and prepare for common buyer questions around concentration, churn, and pipeline quality. Advisors also help coordinate customer reference planning, ensuring this part of diligence builds buyer confidence without disrupting key relationships.
Product and technology due diligence
In product and technology due diligence, buyers assess whether the company’s technology can support its revenue base and growth projections. They want to understand how scalable, secure, and well-documented the platform is, and whether there are any technical risks that could affect post-close performance.
Buyers will typically bring in technical experts or third-party diligence providers to conduct a deeper review. Their goal is to validate that the product works as described, that security practices are sound, and that the engineering organization is well structured for ongoing development.
What buyers typically review in the product and tech due diligence:
- Code quality and documentation standards
- Cybersecurity practices and any historical incidents
- Hosting and infrastructure architecture
- DevOps processes and release management
- Use of third-party tools, components, or licenses
- Product roadmap alignment with market positioning
As a founder, watch out for:
- Security gaps or unresolved vulnerabilities
- Limited documentation that creates dependency on specific team members
- Heavy reliance on unlicensed or poorly documented third-party tools
How advisors help:
Advisors can support founders by anticipating common technical diligence questions, prepare clear documentation, and coordinate with technical leadership to ensure that the product story aligns with buyer expectations. They also help manage interactions with third-party diligence firms as well as keeping the process on track while minimizing distraction for the engineering team.
Tip from L40°
Make sure your software is up to date. Legacy code is not only harder to maintain, it’s also more vulnerable to security breaches. More than one deal has seen a buyer hesitate, or even walk away, after uncovering outdated or unsupported software. Regular updates and documentation signal that your tech is healthy, actively maintained, and ready to scale.
People and HR due diligence
The human resources due diligence focuses on the team behind the business, assessing organizational structure, key roles, compensation plans, and potential risks related to retention or post-close integration.
Buyers want to understand who the key contributors are, how talent is incentivized, and what risks could arise if key individuals leave after the transaction. For deals that include earnouts or deferred payments, clarity around founder roles and leadership continuity is especially important.
What buyers typically review in the HR due diligence:
- Organizational chart and profiles of key employees
- Employee agreements, stock option grants, and incentive plans
- Retention plans for critical team members
- Current compensation structure and alignment with market
- Founder transition plan and post-close roles (if applicable)
Employee turnover trends and cultural considerations
As a founder, watch out for:
- Missing or outdated employee agreements
- Unclear treatment of stock options or incentive grants
- Undefined post-close roles for founders or leadership team members
- Signs of potential turnover risk in key positions
How advisors help:
Advisors play an important role in helping founders frame the team story clearly, from organizational structure to leadership continuity and retention plans. They also work closely with legal counsel to review employment agreements and incentive structures, and provide guidance for post-close role discussions, especially in transactions that involve earnouts or performance-based components.
Tip from L40°
Prepare a strong C-level or skilled operational team that can stay on and support the business post-close, particularly if you’re looking to walk away as soon as possible. Buyers often look for continuity to reduce transition risk, and knowing that there's a stable team in place for the handover and even the long term increases confidence and can support valuation. This is especially important for founder-led businesses where a sudden departure could raise concerns about execution and stability.
Organizing the data room
A well-organized data room sets the tone for a smooth diligence process. Buyers will be working through large volumes of documents across multiple workstreams like the ones described above and they will expect a professional, consistent presentation.
Organizing materials clearly, maintaining version control, and using secure, trackable platforms helps build buyer confidence and prevents unnecessary delays. A cluttered or inconsistent data room can create confusion and signal a lack of operational rigor.
Founders should think of the data room as a living workspace during diligence. As new questions arise, additional documents will be added and responses updated. Keeping everything structured and easy to navigate goes a long way toward maintaining momentum.
Documentation best practices
- Sorting documents by function (financial, legal, product, commercial, HR)
- Using clear and consistent file names
- Leveraging secure platforms like DealRoom or Google Drive (with appropriate permissions)
- Tracking buyer questions and responses centrally to avoid inconsistencies
An experienced advisor helps structure the data room upfront, manage document flow, and coordinate responses, allowing founders to stay focused on higher-level deal priorities.
Founder experience during diligence: Why it matters
The diligence phase often brings a heavier workload than founders expect. Across financial, legal, product, and commercial streams, buyers will submit detailed requests, follow up with clarifying questions, and often return to the same topics multiple times as different teams conduct parallel reviews.
Founders should anticipate a high volume of requests and frequent interactions. It’s important to keep responses consistent. Discrepancies, even small ones, can raise unnecessary concerns.
The right advisory team helps manage this load, triage requests, and coordinate responses, freeing founders to focus on where their involvement adds the most value.
Ready for your own SaaS exit?
If you’re preparing for a sale or simply looking to benchmark your readiness, L40° brings proven execution to every stage of the process. We help SaaS founders navigate diligence with clarity, precision, and discretion, ensuring that the company’s story is presented in the best possible light.
To start a confidential conversation, contact us.
